Analysis of Richard Cook’s Monetary Reforms Part II

Analysis of Richard Cook’s Monetary Reforms as Presented in We Hold These Truths
Part II

Thomas Allen

This paper is Part II of my analysis of Richard C. Cook’s monetary reforms as presented in his book We Hold These Truths: The Hope of Monetary Reform (Tendril Press, 2008–2009). His words and my paraphrases or summaries of his words, I have italicized. My commentary is in roman letters. I have provided references to pages in his book and have enclosed them in parentheses.

Mr. Cook admits that “a strong, functioning economy is required” for his system to work (p. 37). However, he fails to explain adequately how a strong, functioning economy will continue when people are paid whether they are productive or not.

He is correct in that people need leisure time to pursue spiritual, intellectual, and family activities (p. 37). (As not many people will pursue these activities, especially the first two, is the government going to force its wards to pursue these activities?) They should be relieved of perpetual grueling toil (p. 37). However, his scheme does not achieve these goals in the end. Like all collective schemes, it leads to economic stagnation and decline.

Mr. Cook advocates shifting much of credit creation from banks to the U.S. government. The U.S. government needs to lend more. More governmental lending supports “the concept that credit should really be viewed as a publicly-regulated utility . . . ” (p. 39). First, nowhere does the U.S. Constitution authorize the U.S. government to lend money or credit to anyone. Furthermore, the U.S. government will breed more corruption as it lends more. Loans will be used to pay and play political favorites. Second, if credit is a public utility and should be regulated as one, no one could lend to friends or relatives without the approval of some governmental bureaucrat. (Most likely, such loans below a specific amount would be exempted from case-by-case approval. However, such exemption is itself a bureaucratic approval that can be revoked.)

Mr. Cook supports the American Monetary Institute’s recommendations of a Monetary Control Board in the Department of the Treasury setting and overseeing monetary targets and other proposals of the American Monetary Institute (pp. 39, 55, 65, 109, 159, 262). Since Mr. Cook’s system demands injections of money into the economy to fund most of the government and to fill the “gap,” the Monetary Control Board seems superfluous. Its only purpose seems to be justifying ever-increasing governmental expenditures. As I have discussed in detail the American Monetary Institute’s proposal in “Analysis of the American Monetary Institute’s American Monetary Act,”[1] I will not go into any depth on its highly flawed despotic scheme. However, it is a good match for Mr. Cook’s proposal.

Mr. Cook presents the now-defunct Reconstruction Finance Corporation (RFC) and Home Owners Loan Corporation (HOLC) as examples of public credit. He recommends creating programs like these to lend at below-market interest rates to state and local governments for infrastructure projects (p. 39). Thus, he wants to make the states ever more dependent on and subservient to the U.S. government. A major cause of the political and economic problems in this country has been the subordination of the creators (the states) to the created (the U.S. government). Today, nearly all political power has been usurped and concentrated in Washington. The states can do little more than what the U.S. government allows them to do. Mr. Cook’s scheme completes this consolidation.

He also supports the U.S. government lending at below-market interest rates to banks money for banks to lend at some low rate to consumers, students, and small businesses (p. 40). According to Mr. Cook, when the Federal Reserve, which was created by and exists at the pleasure of the U.S. government, makes low interest rate loans, it distorts the economy, creates inflation, and causes all sorts of havoc. However, when the U.S. government does the same thing through another agency that it has established, it causes none of these problems. At least that is what Mr. Cook would have us to believe. It must be who gets the interest. No, it cannot be that because all the interest earned by the Federal Reserve above its operating costs goes to the U.S. Treasury. What is the difference, Mr. Cook?

Mr. Cook describes the current system with fractional reserve banking—creating money out of nothing (pp. 53ff). He remarks “that because borrowed money pays for labor, commodities, rent, etc., it becomes part of the prices that are eventually charged for goods and services. However, when the money goes back to the bank to cancel a loan, that purchasing power disappears” (p. 54). Labor, rent, etc. may become part of the price, but they do not determine the price. To the contrary, the price that the marginal buyer is willing to pay determines the cost of the product or service inputs. Furthermore, Mr. Cook condemns removing money (purchasing power) from the economy once its work is done. Apparently, once money, purchasing power, enters the economy, it should remain there forever. As noted above, this is highly inflationary.

Mr. Cook seems to believe in a “firm law of prices.” Prices do not move to meet the available purchasing media. Once the seller sets his price, it remains fixed. On the other hand, Mr. Cook seems to agree that prices rise and fall as the purchasing medium is inflated or deflated. Yet for some reason, prices do not want to adjust to meet the income, purchasing power, available for purchases. This lack of adjustment is an essential part of Social Credit. Mr. Cook seems to explain this firm law of prices with cost (p. 61). Because of the costs associated with production, prices cannot decline. What he and most other people fail to realize is that costs do not determine prices. Prices determine costs. The actual selling prices of the final products determine all the costs going into producing these products.

Mr. Cook states “the real purpose of money . . . is to serve as a ticket for the purchase by people of articles they need to survive or otherwise desire to utilize once the demand for survival has been met” (p. 55). No, it is not. The real purpose of money is to serve as a ticket for those who have produced to represent their contribution to what they have produced. Then they can exchange these tickets for things that they need and want.

Mr. Cook is correct when he remarks that the financial system does work “against what should be the real purpose of money” (p. 55). However, the real purpose is not what he claims.

Mr. Cook is hostile toward the notion that money is or should be a commodity. Money should not have value in and of itself. Gold and silver money have no intrinsic value (p. 55). If money has no value in and of itself or is not descended from money that did, how does one know the value of the money?

Whether or not gold and silver have intrinsic value is debatable even in hard money circles. If by intrinsic value, Mr. Cook means that gold and silver have no absolute value in and of themselves, independent of human thought, he is right. Neither gold nor silver nor anything else has such value. When people say that gold and silver have intrinsic value, they usually mean that they have value in and of themselves. That is, they have value in their monetary use because they have value in their nonmonetary use. The reason that federal reserve notes have value is that the dollar used to be a definite weight of gold and that the federal reserve notes were once redeemable in gold on demand. If Mr. Cook’s new notes have value, it will be because they are related to federal reserve notes, which were once related to gold.

Mr. Cook is correct when he states “money is anything that a willing buyer and a willing seller agree to exchange for something else” (p. 55). However, no sane person is going to trade a useful product for a worthless piece of paper or an electric blip. That paper or its electronic equivalent can only have value if it is or once was related to something that had value in and of itself.

Under today’s system, people accept federal reserve notes primarily because of legal tender laws. They have to accept them for payment of debt. Mr. Cook gives no hint that legal tender laws should be repealed. Without them, people would soon refuse to accept his money—except for their National Dividend stipend that cost them nothing to accept other than their independence and freedom. If no one was forced to accept his money, it would lose its value as it has no intrinsic value.

Mr. Cook errs when he writes that “unless there are goods and services available and for sale, gold and silver are totally useless” (p. 56). No, they are not. They are highly useful even if not used as money. Their nonmonetary uses are what gave them value that enabled them to be used for money. Today, neither is used as a medium of exchange, yet both are highly valuable. Mr. Cook could not have written and published his book with the equipment that he used without them.

Mr. Cook recites the old myth that gold and silver have no value because “you can’t eat them, live in them, or wear them” (p. 56). One cannot eat, live in, or wear electronic blips, which will be the form of most, if not all, of Mr. Cook’s credits. One can eat, live in, and wear gold and silver. Both are taken orally to treat certain ailments. A house can be built with gold and silver bricks. It would be expensive and highly energy inefficient, but it can be done. (I forgot. Gold and silver have no value, so any house built with them will literally be cheaper than dirt.) Clothes can be and have been made with them.

If Mr. Cook believes that gold and silver have no value whereas his electronic blips do, he should go to some poverty-stricken country like Haiti and find out which one really has value. He will have no problem spending his gold or silver coin. He will have extreme difficulty finding anyone willing to sell him something for his electronic blip.

Furthermore, if gold has no value, why do governments expend many more resources guarding their hoards of gold than they expend guarding any vault filled with paper currency? If gold and silver have no value, why do people expend their time and resources looking for, mining, and refining gold and silver?

Mr. Cook asks, “So by what right do the bankers bind the economy in such a straightjacket of debt” (p. 56)? They have the right because the U.S. government gave it to them through excessive governmental intervention. (This is the same government that Mr. Cook advocates giving even more power.) It did so through the establishment of the Federal Reserve System, excessive regulation of banking, legal tender laws, and other economic intervention. (Under the gold standard, the government allowed abusive fractional reserve banking by allowing bankers to violate their contract to redeem their notes on demand if enough banks could not do so. It should have imprisoned these bankers for fraud and failure to keep their contracts.) Mr. Cook does not object to excessive governmental intervention in the economy. His objection concerns where and how it is used. Mr. Cook even recognizes that governmentally granted privileges, i.e., licenses and regulatory requirements, e.g., minimum capital requirements, contribute to this problem (pp. 56-57).

Mr. Cook insists that money in and of itself has no value. Credit gives money its value. “Without the credit potential of a producing economy, money has no value” (p. 57). If Mr. Cook is correct, then the ancients bought and sold with valueless money. How absurd! Perhaps the most common monetary standard was the cattle standard. People bought and sold based on the value of cattle. Cattle were their purchasing power. According to Mr. Cook, these cattle had no value because the ancients had not developed an economy based on credit. Again, how absurd. People would not have used cattle in exchanges if they had no value in and of themselves. They certainly did not used cattle because of credit as most never used credit, and many would have considered such a notion ridiculous.

Mr. Cook’s concept of “credit” differs from most. To him, “credit” is the economic potential of the economy (p. 58). Money is the measure of credit (pp.58-59).

Mr. Cook believes that the government should control money. Naively, he believes that those who really control the government will control the money for the benefit of the people as a whole (pp. 59-62). That is, those who really control the government will put aside their selfish desires and act altruistically for the betterment of the people. If they would do this, they would be doing it now. History offers only a few examples of such altruism. On the contrary, those who control the government act to serve their own desires and often to the detriment of the people as a whole. Even if those who control the money under Mr. Cook’s system were purely altruistic with no selfish motivation, they would fail in their job because they are not omniscient. To provide the right amount of money, they have to know everyone’s demand preference for money, which is constantly changing, at every moment in time. No committee or individual can ever achieve this no matter how brilliant they are or how much data they have.

Mr. Cook insists that money, and therefore, credit, should be public property and not private property (p. 59). Thus, any money that a person has in his pocket belongs to the government. Since all credit is public property, i.e., it belongs to and is owned by the government, all National Dividend credit given to a person really belongs to and is owned by the government. Therefore, whatever a person buys with money and credit, which are the property of the government, must belong to the government as its property has been used to get the goods and services. Furthermore, everyone loses ownership, and by that control, of his own credit. As noted above, whenever a person borrows money from a bank, he is lending the bank his credit. Under Mr. Cook’s system, this credit now belongs to the government and not the borrower. And Mr. Cook insists that is not socialism (p. 59)! Under his system, the government surreptitiously ends up owning everything.

The founding fathers did not conceive of money and credit being public property. They were to be private property. The monetary system that they devised ensured that the money, gold and silver coins, would be private property. Then all the credit based on this money would remain private property.

Mr. Cook claims that the productive capacity of the country is credit and that credit should be publicly owned, i.e., governmentally owned, utility (p. 58). Yet he insists that this be not socialism. Under socialism, the government owns the means of production or regulates them so heavily that it is tantamount to ownership. The means of production are part of the productive capacity of the country. If the government owns the credit and if credit is the productive capacity of the country, then the government owns the productive capacity. If it owns the productive capacity, it owns the means of production. Is that not socialism?

Mr. Cook states, “It is essential to realize that the central government of a sovereign nation has the right, the ability, and the responsibility to introduce ALL new credit into existence. This is totally different from having the central bank ‘print money’ . . .” (p. 62). Since the Bank of England became a part of the British government in 1946, Great Britain should be an economic paradise instead of the economic disaster that it is. Since 1946 all the money and credit issued by the British central bank, which is an agency of the British government, have been the property of the British government. The British government has been managing the money and credit of Great Britain. Yet Great Britain is financially and economically worse off than the United States. If Mr. Cook is right, Great Britain should be much better off than the United States. It is much closer to Mr. Cook’s system than the United States. The only thing really lacking in the British system is periodically sending everyone a big check to bridge the national income-GDP gap.

Mr. Cook would counter, “Sovereign creation of credit should not be based on debt. It is and should be based on direct lending or spending of money into circulation by the government itself” (p. 63). Where this has been tried, the results have been disastrous and highly inflationary. Massachusetts did this in the first half of the eighteenth.[2] France did it in the 1790s.[3] Both experiments were failures. Whereas these schemes failed, Mr. Cook believes his will succeed by injecting more money into the economy and giving the government more control of the economy through its absolute monopolistic control of credit.

Mr. Cook claims that “it is the job of government to bring that money to where it is needed” (p. 63). How does the government know where it is needed? It has to be omniscient to know. The founding fathers knew that no government is omniscient, and it certainly should not have the power to attempt to obtain such knowledge. Therefore, they left the allocation of money and credit in the hands of the people—the only place it can be if the people are to be free.

Mr. Cook gives an outline of the principles guiding his system. The Social Credit concept discussed above is a key principle (pp. 63-64). They are a mixture of government-private partnerships. Some things are left to private initiative, and some, to government command. In reality, the government decides. In short, Mr. Cook promotes a form of fascism.

While retaining the welfare portion of the welfare-warfare state, he discards the warfare part (p. 64). Welfare and warfare go together like husband and wife in the Biblical sense: They are one flesh. One cannot for long be separated from the other. The exhilarating rush of power that the welfare state gives those who control the government will force it to lust for total power by adding the warfare state. If Mr. Cook wants to abandon the warfare state, he must also abandon the welfare state. Yet he cannot because his system depends on the welfare state mentality.

Mr. Cook advocates spending “sufficient credit into existence to supply the basic operating expenses of government at all levels without recourse to either taxes or borrowing” (p. 65). Then he provides three examples: colonial paper money, the Continental, and the greenback (p. 65). All three of the examples were highly inflationary and highly destructive to the common man’s wealth. They enriched speculators, whom Mr. Cook disdains, and the politically connected. Mr. Cook’s proposal would have the same results. Only his will be more inflationary and destructive. Like them, his new money has no relationship to new goods being offered for sale. Moreover, unlike them, his system makes no pretense of removing excess money. Apparently, he believes that under his scheme, excess money is impossible. (The U.S. note or greenback did not meet the fate of the colonial money and the Continental because Congress ceased issuing more of them and actually reduced the amount in circulation. Furthermore, it set up a mechanism to redeem them in gold. None of these are part of Mr. Cook’s scheme.) Mr. Cook does allow for the collection of some user fees(p. 65), which does nothing to remove any excess.
Unlike some fiat money reformers, Mr. Cook correctly sees that these three types of money were a form of credit money (p. 65). What he does not acknowledge is that they were interest-free, nonrepayable forced loans (although U.S. notes offered payment to the holder between 1879 and 1933).

Mr. Cook proposes a National Dividend program divided into two parts. “One would be a cash stipend paid to all citizens which would also serve the purpose of eliminating poverty by providing everyone with a basic income guarantee. The remainder of the National Dividend would consist or an overall pricing subsidy, whereby a designated proportion of all purchases, including home building expenses, would be rebated to consumers” (pp. 65-66). Mr. Cook does not explain what will prevent people who are paid whether they work or not from following the historical experience of not working. He also fails to explain why his consumption subsidies, especially when people are paid not to produce, will not lead to shortages. His program increases demand while it decreases supply.

He also sets aside part of the National Dividend to give to all citizens upon reaching the age of 18 to use for higher education, trade school, or business investment (p. 66). Is the government going to force them to undertake one of these endeavors? What happens if a person does not want to undertake one of these activities? If the government does not give him the money, it has withheld part of the National Dividend with presumably disastrous consequences. Will the government allow the students to spend their time at college parties? How will it stop it? It cannot demand the students to return the money because that would remove part of the National Dividend. The only solution is for the government to micromanage student activity at college. Giving people money for business investments presents the same problem. Risk-aversion bureaucrats must micromanage the business investments to prevent them from being spent in undesirable ways from the government’s perspective.

Mr. Cook is correct when he states that his program will not create a Utopia (p. 66). It has to have a highly intrusive government just to collect the data needed to compute the National Dividend accurately. He asserts that his program does not relieve mankind of the need to work, etc. (pp. 66-67). Perhaps, but it certainly reduces their incentive to do so.

Endnotes
1. Thomas Allen, "Analysis of the American Monetary Institute’s American Monetary Act" (Franklinton, N.C.: TC Allen Co., 2009).

2. Thomas Allen, "Massachusetts Notes: The Perfect Money" (Franklinton, N.C.: TC Allen Co., 2009).

3. Thomas Allen, "Assignat: The Nearly Perfect Money" (Franklinton, N.C.: TC Allen Co., 2009).

Copyright © 2010 by Thomas Coley Allen.

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